Posted by Christina K. Bell
On a daily basis nonprofit organizations, along with those they serve, face critical issues, financially and nonfinancially; however, due to common misconceptions about lobbying and 501(c)(3) organizations, many organizations fail to voice their concerns to their local legislators. As a result, when state budgets and policies are formed, an important voice is missing – the voice of that organization and its supporters.
It is a common misconception that lobbying is prohibited for nonprofit organizations. This is not true. However, it is extremely important for a nonprofit to monitor its lobbying activities. If a substantial part of the activities of a 501(c)(3) is considered lobbying by the Internal Revenue Service (IRS), an organization’s exempt status can be revoked or denied.
The IRS considers lobbying to consist of any activity that attempts to influence legislation and segregates lobbying expenses into two types:
1) Direct Lobbying – Attempting to influence legislation through communication with any member or employee of a legislative body or with any government official or employee who may participate in the formulation of legislation.
2) Grass Roots Lobbying – Attempts made to influence legislation by attempting to affect the opinion of the general public or any segment thereof.
The IRS measures lobbying expenditures using two methods, the substantial part test and the expenditure test. Under the substantial part test, the IRS considers a variety of factors when determining whether lobbying activities are substantial, including the time devoted (by both compensated and volunteer workers) and the expenditures devoted by the organization to the lobbying activities. An organization that conducts excessive lobbying in any tax year may lose its tax exempt status, resulting in all of its income being subject to tax. In addition, section 501(c)(3) organizations that lose their tax exempt status due to excessive lobbying, other than churches and private foundations, are subject to an excise tax equal to five percent of their lobbying expenditures for the year in which they cease to qualify for exemption.
Organizations other than churches and private foundations may elect the expenditure test under section 501(h) as an alternative method for measuring lobbying activity. Organizations electing to use the expenditure test must file IRS Form 5768, Election/Revocation of Election by an Eligible IRC Section 501(c)(3) Organization to Make Expenditures to Influence Legislation, at any time during the tax year for which it is to be effective. The election remains in effect for succeeding years unless it is revoked by the Organization.
Under the expenditure test an organization will not jeopardize their tax exempt status under section 501(c)(3), as long as its lobbying expenditures are within the IRS specified limit. This limit for any organization, for any tax year, is the lesser of $1 million dollars or as indicated in the table below:
|If the amount of exempt purpose
|Lobbying nontaxable amount is|
|≤$500,000||20% of the exempt purpose expenditures|
|>$500,000 but ≤ $1 million||$100,000 plus 15% of the excess of the exempt purpose expenditures over $500,000|
|>$1 million but ≤ $1.5 million||$175,000 plus 10% of the excess of the exempt purpose expenditures over $1 million|
|>$1.5 million||$225,000 plus 5% of the excess of the exempt purpose expenditures over $1.5 million|
Note: The term exempt purpose expenditures is the total of the amounts paid or incurred (including depreciation and amortization, but not capital expenditures) by an organization for the tax year to accomplish its exempt purposes. Grassroots lobbying expenditures may comprise no more than 25% of an organization’s total allowable lobbying ceiling. IRS Publication 557 provides specific guidelines to lobbying expenditures and those organizations who qualify under 501(h) and should be used as a resource for all nonprofit organizations who either currently participate or are consider participating in lobbying activities.Under the expenditure test, an organization that engages in excessive lobbying activity over a four-year period may lose its tax exempt status, resulting in all of its income being subject to tax. Additionally, if an organization exceeds its lobbying expenditure dollar limit in a particular year, it must pay an excise tax equal to 25% of the excess.In addition to the IRS limitations on lobbying activities, nonprofits are also governed by state law which may require organizations and individuals to register and file periodic reports on their lobbying activities. This is extremely important if your organization pays anyone to influence legislation. For example, an employee, a lobbying firm, a legal firm or a reimbursed volunteer.On January 1, 2013 Delaware Senate Bill No. 185 became effective. If you are a current registered lobbyist within the state of Delaware, or plan to become one, it is important you become familiar with the Bill and the additional disclosures required. Information on this bill and other Delaware specific lobbying information can be found by visiting the Delaware Public Integrity Commission website.When lobbying activities are performed within acceptable federal and state parameters it serves as a way to inform legislators about your organization, to show how your organization impacts the community, to show what the community would be missing if your organization was no longer in operation, and to reflect the commitment you have to those you serve.